Short Answer Questions - Determination of Income and Employment | Economics for A Level PDF Download

1 MARK QUESTIONS

1. What is the relation between APC and APS?
    Ans. APC+APS=1
    
2. What is the relation between MPC and MPS?
    Ans. MPS+MPC=1.
    
3. If APC is 0.7 then how much will be APS?
    Ans. 1-0.7=0.3
    
4. If MPC =0.75, what will be MPS?
    Ans. MPC+MPS=1
   1-0.75=0.25
    
5. State the important factor influencing the propensity to consume in an economy?
    Ans. The level of income (Y) Influences the propensity to consume (c) of an economy.
    
6. What is meant by investment?
    Ans. Investment means addition to the stock of capital good, in the nature of structures, equipment or inventory.
    
7. What is the investment demand function?
    Ans.  The relationship between investment demand and the rate of interest is called investment demand function.
    
8. What is equilibrium income?
    Ans. The equilibrium income is the level of income where AD=AS i.e.…AD=AS and planned saving equals planned investment.
    
9. Give the formula of investment multiplier in terms of MPC.
    Ans. K=1/1-MPC
    
10. What can be the minimum value of investment multiplier?
     Ans.  One.
     
11. What is the maximum value of investment multiplier?
     Ans. Infinity.
     
12. Give the equation of propensity to consume.
     Ans. C=‾‾a+by.
     
13. Write down the equation of saving function?
     Ans. S= -a+ (1-b) y.
     

3 AND 4 MARKS QUESTIONS.

1. Explain the components of equation c= ‾a + by.
   
   Ans. ‘a’ is called intercept and it represents the amount of consumption when there is a zero level of income i.e. autonomous consumption. The consumption is positive at zero level of income. The coefficient ‘b’ measures the slope of consumption. The slope gives the increase in consumption per unit increase in income. This is called as MPC. Consumption changes by ‘b’ for every one rupee change in income. Consumption changes in the same direction as income. 
    
2. Derive the saving function from the consumption function c=‾a+by.
   
   Ans. Saving is equal to income minus consumption (y=c+s).The saving function relates to the level of savings to the level of income. It is derived from the consumption which is as follows:
   Y=C+S
   S=Y-C
   since C=‾a+bY.
   therefore,
   S=Y-(a+bY)
   S= -a+(1-b)Y    (SAVING  FUNCTION).
    
3. Explain the components of S= -a+ (1-b) Y.
   Ans. The saving function is S= -a+ (1-b) Y.-a represents the intercept term and it represents the amount of savings done when there is zero level of income. The saving is negative at zero level of income because at zero level of income consumption (a) is positive. Negative saving is nothing but dissaving, this means that at zero level of income there is dissaving of amount –a.
   The coefficient (1-b) measures the slope of the saving function. The slope of the saving function gives the increase in savings per unit increase in the income. This is known as MPS.  Since ‘b’, that is MPC is less than one, it follows that (1-b) i.e. MPS is positive. Saving is an increasing function of income.
    
4. Can the value of APS be negative? If yes then when?
   
    Ans. The value of APS can be negative when the value of consumption exceeds the value of income. At low level of income saving is negative.
   e.g.: if income is Rs 1000 and consumption expenditure is Rs 1200 
   Y=C+S              S=Y-C
   1000-12000=-200
   APS=-200/1000=0.2             APS=S/Y.
   APS=-0.2.
    
5. Can the average propensity to consume be greater than one? Give the reason for your answer.
   
    Ans. APC can be greater than one when the consumption exceeds the income. At that level APS will be negative .when the APS is negative APC will be greater than one.
   e.g.: if the income is 1000 and the consumption is 1200, APC =1200/1000=1.20.
    
6. When can the APC be equal to one? Give reason for your answer.
   
    Ans. APC can be equal to one when APS =0, i.e when consumption = income.
   E.g: y=1000, c=1000.
   APC=C/Y                 1000/1000=1
   APC=1
   APC+APS=1
   1-APC=APS
   1-1=0
    
7. Explain the meaning of investment multiplier?  What can be its minimum value and why?
   
    Ans. Defined as the ratio of change in the income to the change in the investment.
   K=ΔY/ΔI.
   The value of the multiplier is determined by the MPC. It is directly related to MPC.
   K=1/1 - mpc     = 1/1-0   =1
   K=1
   Minimum value of K is when minimum value of MPC=0, the minimum value of K will be unit one.
    
8. Explain the working of a multiplier with an example.
    Ans. Multiplier tells us what will be the final change in the income, as a result of change in investment. Change in investment results in the change in income. Symbolically:
   ΔI→ΔY→ΔC→ΔY
   The working of a multiplier can be explained with the help of the following table which is based on the consumption that is, ∆I=1000 and MPC=4/5.
   
   PROCESS OF INCOME GENERATION.
   
   
   As per the table the initial increase in the investment of Rs 1000 there is a total increase in the income by Rs 5000 given MPC=4/5 . Out of this total increase in the income Rs 4000 will be consumed and Rs 5000 be saved.
   The sum of total increase in income is also derived as:
   Δy=1000+800=640+512+…………….infinity.
   1000+4/5×1000(4/5)²×1000+(4/5)³×1ooo+………..infinity
   =1000[1+4/5+ (4/5)²+(4/5)³+………infinity]
   =1000[1/1-4/5]   = 1000×5/1=Rs. 5000 cores.
   
   9. Differentiate between ex ante and ex post investment.
   Ans. Ex ante is the planned investment which the planner intends to invest at different level of income and employment in the economy.
   Ex post investment may differ from ex ante investment when the actual sales differ from the planned sales and the firms thus face unplanned addition or reduction of inventories.